IĎm trying to build a model of our future income and expenses during our retirement years. If our current standard of living is $60,000 after tax income, how much should I increase that by each year to keep up with average inflation? The actual Social Security COLA increases from Dec 1998 to Jan 2013 were: 1.30%, 2.50%, 3.50%, 2.60%, 1.40%, 2.10%, 2.70%, 4.10%, 3.30%, 2.30%, 5.80%, 0.00%, 0.00%, 3.60%, 1.70%. The average COLA for the past 15 years was 2.46%, 10 years was 2.56% and 5 years was 2.22%. These same 3 averages for Jan-2009, before the two years with zero COLA, were 2.80%, 3.03% and 3.54%.

So, back to the original question, if we want to be realistic with our model, what type of COLA should we be giving ourselves to maintain our current lifestyle during retirement? And, to expand that for the rest of the mathematical model: What COLA should we use for our future Social Security benefits, what market ROR is best for our IRA accounts, and what annual adjustments should we use for the tax brackets for figuring our future income taxes?

If we use a standard of living increase of 2% and a market return of 10% we can easily retire and fly around the world each year. If we use 3% COLA and a 5% market return we may have to view the world on the National Geographicís channel when we turn 90, if we can afford the cable bill!

Sun Jul 20, 2014 2:25 pm

WinoSenior Member

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I use 2% inflation and 10% market return. The inflation should be ball-parkish, and the 10% should be below actual returns, over time. I am also planning to stay away from my principal, and am setting up rental properties. I figure the rentals will keep up with inflation, and my market funds will provide cushion for other things. I don't count Social Security in my assumptions. It's not that I don't think it will be there, it is that I'm overly conservative in my planning. If I have one thousand or so dollars above and beyond my budget, then it can't hurt. This is also the reason why I don't really know the answer to your social security question; I just ignore that part of the equation.

Sun Jul 20, 2014 3:40 pm

PapaGeekContributing Member

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Thanks for the reply Wino, but you canít just plan on staying away from your principal, the government will force you to start making withdraws at age 70. Just do a google for minimum IRA withdraw and you will find multiple sources for the factors. The first withdraw is forced the year you reach age 70.5 where you are forced to withdraw 1/27.4th of the total of all you IRAís on the previous year-end. At 71.5 the number is 1/26.5 and so forth.

Iím 67 and will be required to do this in a couple years. There are two things about it that Iím not sure of at this point:

Does the total include both Roth and standard IRAís or just the standard ones?

Does the withdraw have to come for each IRA, or is that just a total also?

Be very careful relying on a 10% market return. The actual returns for the past 20 years were: 1.33%, 37.20%, 22.68%, 33.10%, 28.34%, 20.89%, -9.03%, -11.85%, -21.97%, 28.36%, 10.74%, 4.83%, 15.61%, 5.48%, -36.55%, 25.94%, 14.82%, 2.10%, 15.89%, 32.15%. Yes the average was 11%, but if you were relying on that average during your 1999 planning when the S&P return was 20.89%, you would have been creamed for the next 3 years when the returns were -9.03%, -11.85%, and -21.97%, and the one year -36.55% in 2008 would have devastated your portfolio.

Here is how the year to year math works: if you start with $100,000 at the end of 1993 and then use the 20 S&P returns listed above, your portfolio would be $574,534 at the end of 2013, but using 10% as an average return would give you $672,750. Using the average lets you plan on having almost an extra $100,000 that you donít actually have after 20 years.

The situation is worse if you started this planning in 1999, just before the 3 years of market downturn. Your planning would be to have 379.750 after 14 years, the actual balance at the end would be only $163,125, more than a $200,000 deficit.

These number get even worse if you are taking money out of your IRA accounts while the market is doing a correction, especially a 3 years recession like back in 2000 to 2002.

Mon Jul 21, 2014 10:15 am

WinoSenior Member

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quote:Originally posted by PapaGeekthe government will force you to start making withdraws at age 70.

That's on an IRA. I have IRA's, Roth IRA's, and after-tax mutual funds. Only the IRA forces withdrawal, unless the laws change. I can leave my principle untouched.

quote:Originally posted by PapaGeekDoes the total include both Roth and standard IRAís or just the standard ones?

Just the IRA's as I said above.

quote:Originally posted by PapaGeekDoes the withdraw have to come for each IRA, or is that just a total also?

Not sure on this one. I would expect it to be from each. Perhaps someone else has this knowledge.

quote:Originally posted by PapaGeekBe very careful relying on a 10% market return.

That only matters if I must withdraw money. I currently live on less than 20% of what I take home. There's no reason to suggest I won't be able to continue to do so after retirement. The models tell me I need to spend 80% of what I make, but I don't even spend that much now. The 10% is the average I expect to make over time. I expect to be retired for about 25 to 30 years (my 78 year old father is still in excellent health, and he just returned from a drive to Florida for his brother's 90th birthday).

quote:Originally posted by PapaGeekHere is how the year to year math works: if you start with $100,000 at the end of 1993 and then use the 20 S&P returns listed above, your portfolio would be $574,534 at the end of 2013, but using 10% as an average return would give you $672,750. Using the average lets you plan on having almost an extra $100,000 that you donít actually have after 20 years.

The situation is worse if you started this planning in 1999, just before the 3 years of market downturn. Your planning would be to have 379.750 after 14 years, the actual balance at the end would be only $163,125, more than a $200,000 deficit.

These number get even worse if you are taking money out of your IRA accounts while the market is doing a correction, especially a 3 years recession like back in 2000 to 2002.

As I said, this assumes I MUST withdraw money. I won't be forced to. I should have 6 rental properties clearing over $1K per month upon retirement. The funds are gravy, and social security is the cushion. I'll be fine once I quit working. Worst case, I can become a consultant. I'm well-known in my field (oil and gas), and I can easily get a very liveable wage as a consultant if I decide to continue to work after "retirement."

Assuming 10% returns and 2% inflation leaves me with 8% real returns over time. Some years I'll do better. Some years I'll do worse. When I want an around-the-world cruise, that year's returns might matter, but over all, I can just cut back. My house is paid for. As long as I cover taxes and insurance, there's no problem there. My retirement expenses should be easily covered under the not-looked-at social security. One day of consulting will pay a month's worth of expenses. Two months of consulting, and I'll be making close to twice the national average annual income.

Maybe others suggest other levels. I'm comfortable with the levels I've chosen. They should keep me ball-parkish to where I'm at, and my other income streams will tide me over. That, plus the fact that I'm not a profligate spender, should see that I retire comfortably.